For those of you making big speculative bets based on what Boone Pickens had to say last night on Mad Money, let me just say "whoa there, cowboys," and I don't just mean Boone's fabulous support for the Cowboys of Oklahoma State.
Yes, it is true that Boone identified several potential targets for the likes of an ExxonMobil (XOM) that desperately needs production growth. He suggested that it would be much more lucrative for the majors to drill on Wall Street, mainly bids for a Pioneer Energy Services (PES) or a Concho Resources (CXO) or an EOG Resources (EOG). All of these companies have terrific properties in the Permian and Eagle Ford, where the oil's easy and cheap to get out of the ground, and the infrastructure is plentiful to get the oil to market.
Also, my friend Dan Dicker suggested that Cimarex Energy (XEC) and Anadarko Petroleum (APC) be included in the mix. Again, these are high-quality companies that aren't overstretched. Continental Resources deserves to be in the mix for a comeback, too, Dicker adds. The discussion can be found in two really good videos we did this morning. I like that there's been some hefty insider buying at EOG, no doubt suggesting that the stock's decline reflects an overshoot vs. where oil is, although the price that the CFO got for his almost million-dollar purchase is higher than where the stock is now.
However, I want to emphasize that in no way would I put a full position on for any of these. The braintrust I use at RBN Energy, the best oil source I have, emphasizes one thing. While permits have been cut back for drilling in this country, plenty of plans in place will continue the overproduction we have seen, and down cycles tend to last longer than the one we are having. After all this, one pretty much just got started.
Dicker also points out that some companies, like Encana (ECA), Halcon Resources (HK), SandRidge Energy (SD), Apache (APA), and Devon Energy (DVN), could see some weakness going forward, because their properties came at a high cost.
Then, there are the persistent worries about the worthiness of the junk bonds that many companies had issued. David Faber of CNBC reports that as much as 18% of the high yield market is junk from oil companies, some of which are overstretched. Remember, Pickens is concerned about any company that's outspending its cash flow to drill.
It is true that the cost of drilling could come down because of the decline in the growth rate of exploration. Hmm, another reason to like that Halliburton (HAL) and Baker Hughes (BHI) tie-up as a defensive play against oil companies who are unwilling to pay up for services. I don't have any doubt that the OPEC suicide pact can last. The Saudis aren't lone gunmen. There are other nations that will demand cutbacks, now that we have seen what happens if OPEC continues its laissez-faire approach.
However, the idea that happy days are here again, and that oil companies can be bought for more than a trade on the comments Boone made on Mad Money, seems to fly in the face of pretty much everything that says the bottom's not yet in for oil.
In other words, try not to get hurt. Companies like Exxon don't suddenly say: "let's take advantage of the price break and make an offer to EOG that it can't refuse." A stretched company that goes belly-up puts pressure on all of these independents.
Sure, there are good companies and there are bad companies, but don't expect a big separation to take place yet. There's too much turmoil and not enough clarity to say: "ride 'em, cowboy." "Trade 'em, cowboy" is more like it.